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Warren Buffett Makes Big Bets, Investments in Q3

Berkshire Hathaway, Inc. (BRK.A), the company run by billionaire investor Warren Buffett, showed a major buying spree during Q3 in its quarterly earnings report, making $23.9 billion in new investments and derivative bets despite volatile markets. This comes as Berkshire Hathaway is edging closer to the $30 billion threshold for credit default swaps that would bring the company under the watch of the Federal Stability Oversight Council that was created by the Dodd-Frank Act last July.

Buffett Active in Stock, Derivative Markets

Buffett was active in the third quarter, investing the most in one quarter in 15 years, including a $5 billion investment in Bank of America (BAC) preferred shares, the $8.7 billion acquisition of chemical company The Lubrizol Corporation, the purchase of $6.9 billion in common stock, and increased investments in the derivatives markets. Buffett, who referred to derivatives as "time bombs" in Berkshire Hathaway's 2002 annual report, appears out of character to some degree in making such large investments in derivatives. “Historically, he has preferred consumer products and banking to industrial companies,” said James Armstrong, president of Henry H. Armstrong Associates, one of Berkshire Hathaway's shareholders. “But the market changes, so the names he comes up with changes.”

The derivative bets, which Buffett is using to speculate on long-term gains in the equity markets, are mostly bets on the S&P 500 that won't settle until 2018 at the earliest. This represents an approach from Buffett that seems to go against the grain, but Thomas Russo, a partner at Berkshire investor Gardner Russo & Gardner, says that, “He sees something, and it's big.” On the whole, Buffett appears to be shopping for value, telling PBS's Charlie Rose in August that he made the biggest single-day investment in the company's history the day that the United States had its credit downgraded, likening it to buying items "on sale." In the short term, though, the derivatives hurt Berkshire Hathaway, losing over $2 billion in value in the third quarter. The quarterly earnings report, released after market close on Friday, showed a 23.8 percent year over year decrease in profits for Berkshire Hathaway, bringing in only $2.28 billion. Stock in the company reacted Monday, losing just under 1 percent in value in early trading.

Credit Default Swaps Close to Threshold

Berkshire Hathaway was also in the news because it appears to be poised to go over the threshold of $30 billion in credit default swaps that would move the company under Federal Reserve oversight in accordance with new regulations created by the Dodd-Frank Act. The regulations are designed to prevent another financial catastrophe like that of 2008 by identifying those non-banking financial firms that are so linked to the broader markets that their failure would require a bailout and beginning oversight before a bailout is necessary. Berkshire Hathaway, with $29.7 billion in outstanding credit default swaps on its debt, could very well fall into this new category. The new standards, proposed on Oct. 11 to the Federal Stability Oversight Council, which is chaired by Secretary of the Treasury Timothy Geithner and includes Federal Reserve Chairman Benjamin Bernanke, should have "captured" institutions like Bear Stearns, Lehman Brothers (LEHMQ) and IndyMac Bancorp, Inc. (IDMCQ) during the 2008 crisis and should mean further scrutiny for American International Group (AIG) and MetLife, Inc. (MET) among others moving forward.

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